Innovative energy storage projects fall prey to the "missing middle" of climate finance. The current investment models of traditional market actors don’t meet the needs of these projects and so they struggle to secure the capital to move from feasibility to construction. High transaction costs and high perceived project risk are critical deterrents to providing the affordable, patient capital that’s needed. During the Energy Storage Capital Challenge, leading thinkers like S2G Ventures and Trellis Climate highlighted the need for growth equity that can deploy small check sizes and offer fit-for-purpose capital for innovative energy storage projects.

HIGH TRANSACTION COSTS

Banks are often reluctant to fund these smaller deals or process associated tax credits. Due diligence costs are generally fixed across deals, making larger projects more attractive. Despite a compelling investment opportunity, investors and financiers must dedicate significant time and resources to underwriting each deal before presenting it to the investment committee, which means diverting attention from larger and more predictable opportunities. Evaluating breakthrough technologies, business models, revenue streams, and permitting pathways further complicates the process.

In addition, short-term, lower-cost financing needs, such as funding equipment deposits before product delivery, add to the burden of due diligence. Smaller projects also tend to grow unpredictably as customers gradually add capacity or infrastructure. This dynamism can trigger a need for greater diligence or re-negotiation of contracts and may be seen as too uncertain for investors who prefer the stability of more established projects.

PERCEIVED PROJECT RISK DRIVES UP
COST OF CAPITAL


As a nascent industry, energy storage revenue streams are not as straightforward as those for wind or solar, often involving multiple streams that are tied to specific project performance requirements. Additional use case or technology innovation on top of an already unfamiliar business model increases the perception of risk for capital providers. Financiers may also be wary about the long-term sustainability of the new companies behind innovative projects. As a result of this perceived risk, small, innovative projects struggle to secure non-dilutive, inexpensive capital. This creates a "cold start" problem, forcing developers with innovative projects to rely on expensive equity and debt that limit growth and the ability to scale.